Let me preface this by saying that this is not my primary retirement fund. This fund is something I’ve been meening to move for years and never got around to it.
I have a 401k from a previuos job that is in active. I would like to make a with drawl as a gift for my daughters wedding. Should I switch this fund into a roth ira? before hand ? I know I will pay a hefty penalty. Which method will lessen the impact of tax that I will pay on the withdrawl. Is there a better time of year to make this move? Thanks Terry!
Terry Says: How old are you? If you are younger than age 59-1/2, you simply cannot afford to withdraw money from this account. It will cost you a 10 percent tax penalty, as well as ordinary income taxes. And you can’t “borrow” money from an inactive 40l(k). You also can’t evade the taxes by rolling to a Roth — they figured that out long ago — and the rollover money has to stay in the Roth for 5 years before it can be withdrawn tax free.
In all of these scenarios, you lose future tax-free growth, and your heirs (if it is converted to an IRA) lose the ability to “stretch” out the future tax-deferred, or tax-free growth of the account. Meanwhile the wedding will be over in an hour! I urge you to find another source of money for the wedding, and roll your old 40l(k) into a traditional IRA so that no taxes are due. Have your new IRA custodian (Fidelity or Vanguard or T. Rowe Price) handle this for you. Invest it for growth, name your daughter a beneficiary, and tell her this will be a long term gift!